Can Banks Solve their Small-Dollar Loan Problem with Fintech Partnerships?

Aura, a San Francisco-based fintech offering affordable loans to low to moderate-income households, wants to partner with banks to offer those loans to consumers who have traditionally been unable to secure them from larger institutions.

CEO James Gutierrez told Bank Innovation his vision is for Aura’s 1,200 storefront partner locations to grow to 20,000 locations, including in bank branches, so it can rival the payday industry’s reach. He said he sees openings thanks to technology and recent encouragements by regulators for banks to serve credit-invisible or thin-file consumers.

Fresh off a rebranding that included a name change from Iniskt, Aura has provided more than $390 million in affordable, credit-building loans to 320,000 borrowers since the company’s launch in 2014. It uses technology that enables local businesses to quickly and efficiently administer in-person credit applications.

Gutierrez said two-thirds of Aura’s borrowers have seen improvement in their credit score by over 300 points, at least among those borrowers who have a credit score when they get their second loan.

Aura uses over 3,000 variables in processing applications, he said. Many of them come from questions like how many dependents one has, how many people live in the same household, and how many of those people work. Applicants are also asked about income and expenses.

“Then we buy a lot of data and we compile all of that into automated algorithms,” he said. “Finally, because we are partnering with businesses, we ask the businesses if they have data on their customers.”

One of Aura’s partners, for example, is remittance firm DolEx, which has hundreds of storefronts for cross-border money transfers. He said Aura can use APIs (with an applicant’s approval) to connect with their partners’ databases and see what kinds of transactions are taking place and how often they’re taking place.

“We can use their data as an incremental set of data that we can use to help underwrite borrowers,” Gutierrez said. “A big part of our model is to try and continue to get access to more data sources so we can get better and better and we can approve more people.”

Borrowers can typically apply, answer a series of questions, and get determinations on prequalification and conditional approval in a matter of minutes. Aura then requires verification of documents such as paycheck stubs, bank statements and tax filings, which can be submitted via a mobile app or in-person at one of the storefront locations.

The average loan offered by Aura is $1,200, to be repaid over a 12-month term. Payments are every two weeks show, matching a borrower’s paycheck cycle. The range of loans available run from $300 to $4,000, to be repaid over six to 36 months. There’s a max simple interest rate of about 36%.

“Making the math work on small loans is very hard, and we think you need a model that really uses technology like ours, so you can do it at lower rates and see great outcomes where people build their credit score,” Gutierrez said.

“I think banks are listening,” he said. “Banks care about their regulators.”

Because Aura is designated a Community Development Financial Institution, banks can lend to the fintech and get CRA credits in return.

“It’s helped us get a lower cost of capital from banks and we think it’s a win-win because banks, for a lot of reasons, have not been able to offer a small dollar loan product that competes as an alternative to payday loans,” Gutierrez said.

Gutierrez said Aura is currently in talks with a few banks to see if they could open up a bank account and give borrowers a debit card with every loan.

Steve Smith, CEO of financial data aggregator Finicity, told Bank Innovation that banks are certainly interested in expanding their reach in terms of products and services.

“If those who are creditworthy but unknown to the bank, become known to the bank, then the bank can provide their financial products and services to those clients,” he said. “It’s always been interesting to the bank to try to figure out how to crack this question of, ‘How do we lend to those who maybe sit outside the current scoring methodology, but are creditworthy, and have both the willingness and the ability to repay a loan?’”

Smith said financial inclusion, to him, means inclusion within the mainstream of financial services and products. He said a big step toward more inclusion came with the ability for credit-invisible or thin-file consumers to grant permission to access financial transaction data that can be used to create a more complete credit profile.

What’s in a name?

Gutierrez said the name change from Insikt to Aura, announced last week, is about creating a brand that resonates more with its borrowers.

“With a strong brand we can drive more people to our partners’ stores,” he said. “We’re evolving from a purely white-label relationship with our partners into a co-branded relationship and we believe it makes the offering stronger.”

With Aura, Gutierrez said there is more emphasis on financial education and literacy. Borrowers get a personalized summary of what’s in their credit file, including a free credit score, and are provided with a suggested monthly budget. There is also now a loyalty program through which borrowers can earn rewards for on-time payments and other progress.